Contract Basics

How do you create contracts without using a lawyer? We'll show you the ins and outs of business agreements.

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June 5, 2000

Q: I'm starting a new service business that will require signing a contract with customers and probably one with vendors as well. I don't think I can afford a lawyer, but I don't want to find myself in trouble later because my contracts didn't spell out everything clearly. Any help on where to find general contract information would be appreciated.

A: Many new business owners find themselves in need of some kind of written contract or agreement to use with customers or clients, vendors and perhaps others as well, so your question is a good one. First, a word about attorneys in general: Usually you can locate an attorney who understands your need to keep initial start-up costs low and will be willing to work with you in a way that suits your needs and your budget. For example, you might bring the attorney a rough draft of your proposed contracts and the attorney would review and revise what you created for a small fee. One of the best ways to locate attorneys who are accustomed to working with start-ups in this way is to obtain a referral list from your local Small Business Development Center (SBDC). SBDCs are located on many college or university campuses throughout the country. Another good approach is to ask other business owners in your industry for recommendations.

When registering with an attorney, as with any professional, it's always a good idea to tell the attorney exactly what you want done and find out in advance how much it will cost-at least within some tolerable limits. Obviously, this is common sense advice that applies to many of life's situations, but sometimes new business owners get so impatient to "get going" that they put their common sense on hold.

Whether or not you're going to utilize this approach to your contract needs-part "do it yourself" and part "seek professional advice"- there are a few things about contracts you should know.

The essential elements of a business agreement are:

1. The parties to the agreement. In other words, your business name and the name of the other party, whether that's a customer or a vendor.

2. What each party is going to gain from the agreement. This is referred to in legal vocabulary as consideration.

3. The main terms of the contract. For example, what each party is promising to do. Obviously, it's extremely important this part of the contract be very specific and include such things as the work to be performed, the price to be paid for the work, how and when payment will be made, when the work will be completed, how long the contract will be in effect, and whether either party is "warranting" anything.

4. Additional terms should probably include: conditions under which either party can terminate the contract, whether either party can transfer or assign the contract to another person or company, whether disputes arising from the contract may be arbitrated or mediated, payment of attorney's fees if one party breaches the contract, an address where legal notices can be sent to each party, and which state law applies if questions about the contract arise.

5. Execution. Be sure both parties sign the contract and the person signing (if he or she is representing a company) has the authority to sign.

6. Delivery. Make sure each party receives a copy of the final signed agreement.

7. Date. This is the date the contract is signed.

If you're going to attempt to save some legal fees by drafting contracts on your own, the first step is to gather sample contracts from other people in your industry, your trade or professional association or from contract form books you can find in your local library.

Take note: If you're selling or repairing new or used vehicles or mobile homes; performing home repairs; renting apartments or homes; providing funeral, burial, or cremation services; or doing door-to-door sales, your contract may have to comply with special rules in your state.

Carlotta Roberts has a J.D. degree from Atlanta Law School. Having worked in the areas of business organization, contracts and employer/employee relations, she's been a consultant to small-business owners since 1981. She worked as a staff attorney concentrating in employment law issues before joining the Small Business Development Center national network in 1986. Currently area director for the Kennesaw State University Small Business Development Center near Atlanta, she has developed two nationally recognized programs: The Cobb Micro Enterprise Council, which won the Vision 2000 award for small-business development in 1999, and the Franchise Institute, developed to provide assistance to franchisees.

The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.